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FG’s borrowing does not reflect share of economy

World Bank 2021 projections: Nigeria growth prospects hang on vaccine success and more

Banks’ credit to Federal Government of Nigeria has risen as seen in the fourth quarter (Q4) of 2020, where it picked up by 18.17 percent to N32.7 trillion, from N27.67 trillion in the corresponding period (Q4) of 2019, data from the Central Bank of Nigeria (CBN) indicate.

This means the Federal Government borrowed more during the period under review due to low revenue occasioned by the impact of Covid-19 pandemic.

Although the current borrowing position of the government is not at the expense of the private sector, as credit to private stood at N30.17 trillion in December 2020; but if credit to government rises further, it may crowd out credit to the private sector.

The government had said that it would in the Q1 2021 borrow a total of N2.23 billion locally to finance this year’s budget.

According to FBNQuest in a note on Tuesday, the virus has reduced the Federal Government of Nigeria’s revenue and boosted its borrowing. “Reverting to the Central Bank of Nigeria’s (CBN) big number series, we find that credit to government (from all lenders and not only the DMBs) represented 27.5% of total credit to all parties in December ‘20, compared with 26.2% one year earlier and 17.6% in November ’18. Our comment on revenue collection still holds and the FGN’s fiscal stance is as expansionary as ever, so we should expect a further rise in the share of credit to government,” it noted.

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Lenders’ credit to the government increased by 8.97 percent from N30 billion in Q1 2020 to the current numbers – N32.7 billion in Q4 2020.

On a month-on-month basis, credit to the government went up by 6.37 percent to N11.5 trillion at the end of December 2020, compared to N10.8 trillion in November 2020.

Ayodeji Ebo, senior economist/head, research/strategy, Greenwich Merchant Bank, said the development reflected government borrowing more to fund its projects as revenue was down.

One positive thing is that the private sector was not crowded out this time, as it used to be the other way round, Ebo said, saying credit growth to private sector reflected more companies borrowing from the banks as a result of low-interest rate.

Nigeria’s central bank in September 2020 cut its benchmark interest rate by 100 basis points to 11.5 percent from 12.5 percent in May 2020.

Net domestic credit to the private sector increased by 13% y/y to N30.17 trillion at end-December ($76.6bn at the rate on December 30), according to the CBN. It has now posted double-digit growth since April ’19, which reflects in part the CBN’s tightening of its loans-to-deposit ratio for deposit money banks (DMBs) to 65% with effect from December ’19.

Another factor has been the development financing by the CBN, which has disbursed N2 trillion under its various credit interventions since the emergence of the Covid-19 virus, according to the latest communiqué from the Monetary Policy Committee (MPC). The interventions will continue, and most likely accelerate, judging from the committee’s exhortations to the CBN, said FBNQuest.

The MPC at its last meeting in January 26, 2020, urged the central bank to sustain its current drive to improve access to credit to the private sector while exploring other complementary initiatives, in collaboration with the Federal Government, to improve funding to critical sectors of the economy.